There are some decisions which require lot of thinking. You cannot just adopt “Rocks, scissors and Paper” to come to a decision in such cases. Lot of thinking, analysis, debates are behind such important decisions. Same has been the situation of Luke and his wife Daisy. They have made this big decision of buying a new home. They have analyzed various areas and bunglows and buildings and flats. Finally they have shortlisted a small home and are about to do the paper work.

Luke has analyzed all the positives of that area and the amenities that are nearby. Daisy, on the other hand is having a hard time. Since it is the biggest decision for her after her marriage, she has been going nuts. She is having nightmares of all the possible things that can go wrong with the house and the new place.

But nothing went wrong in their case and they are living happily in the new home. Luke, being an intelligent person had done some proper analysis and predictions. He made calculations of the possibilities and future prospects of that area and came with a positive outlook. Impressive right? But do you want to know a little secret?

Luke has some amazing analytical skills. So the question is that from where did he get such skills? Is it hereditary? Or has he developed it over time?

The answer is that, Luke is a big fan of Warren buffet. He has been investing in the stock market since long time and has been doing pretty good as well. How do you think was he able to buy such a magnificent new home? Before investing in any company, he has done some good analysis of that sector and industry. He came up with his own report and then decided on whether to invest in that sector or the company. So let’s make use of Luke’s analytical skills and get insights into what is industry analysis and how to perform the same.  So lets learn the basics of Industry analysis.

What is Industry Analysis?

Before starting with the actual meaning of the industry analysis, first let’s understand what an Industry is?

Industry is a collection of Competitors producing similar product or offering similar services to their customers.

So the next question is, why are we studying that industry?

To make sure that if it is a best industry or the worst industry to enter into or invest into.

Industry analysis is a tool which enables a company to understand its position relative to other companies that produce similar products or services like it. While taking into account the strategic planning process, a company has to specifically understand the forces at work in the overall industry. Thus the processes of Industry analysis enables businesses identify the threats and opportunities facing them. It helps them to focus their resources on developing unique capabilities which can help them to gain competitive advantage.

Understanding the industry and forecasting its future trends and directions gives the companies knowledge they need to react and control their portion in the industry.

Major elements of Industry analysis

1. Understanding the underlying forces at work

• Competition intensifying
• Changing customers’ needs and taste
• Technological innovation
• Globalization
• Entry of major competitors
• Sudden regulation or deregulation

2. Understanding the attractiveness of the industry

• Whether it is feasible to enter or invest in that industry.

3. Understanding the critical factors that determine success within the industry.

Importance of industry analysis

• It is an important element of any investment that one wants to make.
• In order to succeed in a specific industry, it is important for the business owners to analyze that industry.
• Important for positioning the company in the niche market
• Aids the companies to identify the potential opportunities.
• Helps in analyzing the threats
• Helps analyzing the fit between internal management preferences and the business environment.
• Helps in mitigating the risk of entering an extremely competitive business.

Ways to perform Industry Analysis

Threat of new entrants refers to the threat that the new competitors pose to existing market players in the industry. Naturally, a profitable industry will attract more competitors who are looking to achieve profits. If the entry barriers in the industry are low, it may pose a great threat to the firms who are already competing in that market.

Supplier power refers to the pressure that the suppliers can exert on businesses by raising prices or lowering quality or reducing product availability. Strong suppliers can pressurize the buyers by raising product prices or lowering product quality or reducing product availability. All of these things directly costs to the buyer.

It refers to the pressure that the buyers can exert on businesses to provide them higher quality products, better customer service, and at lower prices. Strong buyers can make the industry more competitive, thus decreasing the profit for the seller.

Competitive Rivalry

It is the extent to which the competitive firms within an industry can pressurize each other’s, thus decreasing the profits. Fierce competition may lead to stealing of profits and market share within the competitors

It is the availability of a substitute product which the buyers can find instead of a core selling product.

Industry Analysis in 3 Steps

 # Gathering the Data

Define the industry on which you would like to perform research activities. It can be a broad industry or a niche industry.

Information sources that will help you conduct your industry analysis are different for every business. For example, you might need local information which you can get from your local chamber of commerce. Or you might be able to find your industry analysis information at government websites. You can also find out government statistics, or other commercial statistics. You may have to conduct some internet searches to track down the information.

If information is difficult to obtain at one particular site, youll have to extrapolate information from different sources to get the information youre seeking. Start finding the data from government websites or any other websites where proper data is available. Check academic databases for any published information on your area of interest.

• Compile relevant data using the sources above.

Start making notes of annual revenues, number of involved companies and work force statistics of the desired industry. Find statistics about the size of the customer base and buying trends.

Start your report with a general description of the industry. Include one or two paragraphs about the industrys size, products, and geographic concentration.

Include information about the company that you may want to research. Fill in all the general and relevant information about the company.

Understand the competitors and mention some statistical information about their revenues, profit etc. Describe their product range if possible. Mention about their strategies and   forthcoming products.

Porters five forces analysis and PESTLE analysis for the industry and SWOT analysis of the company.

GDP and Inflation effects

Mention about how much the sector has been contributing to the GDP and how it has been affected by the rising inflation. Give future outlook on the same.

Try to understand the answers for the following questions.

What are the industry’s foremost economic characteristics?

To answer this question, you can acquire data about the industry from governmental census data, or sites such as Yahoo.com, or other data-intensive web locations.

What kinds of competitive forces are industry members facing?

Understand the interrelationships among companies in the industry and their suppliers and buyers. Also understand the ease of entry and exit from the industry.

What are the Change driving factors and their impacts?

Understand the characteristics like changing social trends, demographics, regulatory issues, etc

What market positions do rivals occupy?

Analyze who is strongly positioned and who is not? Many websites list down company’s key competitors, and information about them. It can serve as a starting point for this question.

Finally you should get a positive response to the following question..

Does the industry outlook look attractive? 

Points to stress upon in Industry Analysis

1.    Industry attractiveness and industry success factors

• Industry attractiveness is the presence or absence of threats which is exhibited by the industry forces. Thus greater the threat posed by any of the industry force, less the attractiveness of the industry

• Success factors are the elements which play a major role in determining whether a company will succeed or fail in the given industry. Some examples of success factors are- quick response to market changes, product line, proper and fair prices, product quality, sales support, a good record for deliveries, financial position and a management team.

2.    Analyzing the future of the industry or the Sector

• One of the important factors in industry analysis is analyzing the future of the sector. Here one can see how has the industry performed historically. Looking at the historical trends, one may analyze how the industry is expected to perform in the future.
• However the future of the sector is also affected by the major changes or regulations related to that industry. Hence it is important to analyze these factors for the same.

3.    Demand and Supply Analysis

Demand and supply Analysis also plays a major role here. The following factors of demand and supply may affect the industry-

• If demand increases and supply remains unchanged, its leads to shortage of goods, thus prices increase.
• If demand decreases and supply remains unchanged, it leads to surplus goods and decrease in price

Thus analyzing how the supply- demand trend of that industry is an important factor

4.    Effect of inflation on the Industry

• Inflation has affected major economies of the world over the past years. Hence analyzing the effect of inflation on a particular sector becomes extremely important in the industry analysis process.
• Savings as well as investments are affected during high rate of inflation. Hence most of the companies are affected adversely due to lesser demand for their products and services.

5.    Other important factors that can be considered for Industry Analysis are

• Size of the industry
• What sectors does it include?
• major players in this industry
• Markets and customers
• Estimated sales for the industry (This year? Last year? The year before?)
• National/economic trends affecting the industry?
• National/economic trends that might affect it in the future
• Long-term outlook
• Competitor analysis
• Competitive advantage of the business
• Target Market analysis
• Market growth rate
• Market profitability
• Industry cost structure
• Distribution channels
• Success factors
• Success Details

Considerations for Industry analysis

• While carrying out an industry analysis, one should consider which of the forces poses the greatest threat to the business.
• Companies may then undertake careful strategic planning to mitigate these threats.
• Managers also should consider their own preferences and internal capabilities before undertaking a strategy developed from an industry analysis.

Business Cycle Analysis

Try to classify the industries according to their growth cycle, it may form an important part of your analysis.

Growth industries